Overbilling vs Underbilling: What’s the Difference?

Overbilling vs underbilling generally describes the difference between how much a business has billed a customer and how much revenue it has recognised from the contract to date.

Simply put, overbilling means invoices are ahead of recognised revenue, while underbilling means recognised revenue is ahead of invoices.

This is separate from whether an amount is contractually due. A customer may legitimately be invoiced in advance under an agreed deposit, milestone or progress-payment schedule even though the business has not yet recognised the same amount as revenue.

The concept is especially relevant to Malaysian companies working on long-term projects, milestone contracts, retainers or progress billing.

What Is the Difference Between Overbilling and Underbilling?

The easiest way to understand overbilling vs underbilling is to compare cumulative customer billings with recognised revenue.

Area	Overbilling	Underbilling
Basic meaning	Billings are ahead of recognised revenue	Recognised revenue is ahead of billings
Cash flow	May improve short-term cash flow	May pressure short-term cash flow
Accounting effect	May result in a contract liability	May result in a contract asset
Common cause	Advance billing, deposits, milestones	Delayed invoicing, approvals, admin delays
Main risk	Future obligations may be overlooked	Revenue may not convert into cash quickly

For Malaysian entities applying the Malaysian Financial Reporting Standards, MFRS 15 Revenue from Contracts with Customers, which is equivalent to IFRS 15, generally links revenue recognition to the satisfaction of performance obligations rather than simply to invoice timing.

This means billing and recognised revenue do not always move together.

What Is Overbilling?

Overbilling generally occurs when cumulative billings are greater than recognised revenue to date.

Suppose a contractor has recognised RM200,000 of revenue based on project progress but has already billed RM250,000.

RM250,000 billed – RM200,000 recognised revenue = RM50,000 overbilling

This does not necessarily mean the contractor made a mistake.

The contract may require advance or milestone payments before the related work is fully completed. Receiving money earlier can help fund materials, salaries and subcontractors.

From an accounting service perspective, however, the excess amount has not necessarily become revenue yet. Where consideration is received or becomes due before related goods or services are transferred, MFRS 15 may require a contract liability until the relevant performance obligation is satisfied.

When Does Overbilling Commonly Happen?

Common situations include:

• Advance payments: Part of the contract value is billed before work begins.
• Milestone billing: A set percentage is invoiced when a contractual milestone is reached.
• Front-loaded contracts: Larger payments are collected earlier in the project.
• Deposits and retainers: Funds may be received before services are fully provided.
• Billing errors: Wrong quantities, rates, duplicate charges or calculation mistakes can also cause genuine overcharging.

A billing error is different from normal project overbilling. If the invoice itself is wrong, it should normally be corrected.

What Is Underbilling?

Underbilling generally happens when a business has recognised more revenue than it has invoiced.

Imagine an engineering company has recognised RM300,000 of revenue but has issued invoices totalling only RM240,000.

RM300,000 recognised revenue – RM240,000 billed = RM60,000 underbilling

That can become a cash flow issue because part of the recognised revenue has not yet reached the invoicing stage.

Under MFRS 15, where a business has transferred goods or services but its right to payment remains conditional on something other than the passage of time, the amount may be presented as a contract asset.

If the right to payment is already unconditional, the amount is generally presented as a receivable instead.

When Does Underbilling Commonly Happen?

Common situations include:

1. Invoices are issued late.
2. Progress claims are delayed pending certification or approval.
3. Variation orders remain unresolved.
4. Project managers do not report completed work promptly.
5. Billing milestones are poorly structured.
6. Documents such as purchase orders or timesheets are incomplete.

An unapproved variation should not automatically be treated as recognised revenue or underbilling. Whether related revenue can be recognised depends on the contract, enforceable rights and MFRS 15 requirements.

Read More: What Is Creative Accounting and When Does It Cross the Line?

Is Overbilling the Same as Charging a Customer Too Much?

Not always.

In project accounting, a company may be legitimately overbilled because the contract allows advance or milestone billing. The invoice can still be correct.

For example, a software company signs a RM120,000 development contract and bills RM40,000 upfront. At that point, it may have recognised only RM10,000 of revenue.

The project is temporarily overbilled by RM30,000, but the customer has not necessarily been wrongly charged because the payment schedule was agreed in advance.

By comparison, if the invoice should have been RM40,000 but an employee accidentally issues RM50,000, that is a billing error.

What Happens If a Malaysian Business Issues the Wrong Invoice Amount?

Malaysia’s e-Invoice system makes accurate billing records increasingly important.

Under HASiL’s current e-Invoice guidance, a supplier can cancel an e-Invoice containing errors within 72 hours from the time of validation.

After that period, adjustments generally need to be made using a new:

• Credit note: Reduces the value of a previously issued e-Invoice where no cash refund is involved.
• Debit note: Records additional charges.
• Refund note: Records money returned to the buyer.

Businesses should make sure corrections are reflected not only in their internal accounting records but also in the appropriate e-Invoice documentation.

Why Can Overbilling Become a Problem?

Overbilling can initially look positive because cash is coming into the business earlier.

The risk is treating that money as though the corresponding revenue has already been fully earned.

Suppose a contractor bills RM500,000 but has recognised only RM380,000 of revenue. The extra RM120,000 may still relate to work that must be completed later.

If management treats the full RM500,000 as completed profit, the business may struggle to fund the remaining work.

Overbilling can also distort internal performance reports if management focuses only on invoices issued rather than recognised revenue, project costs and remaining obligations.

Why Can Underbilling Be Dangerous for Cash Flow?

Underbilling is often less visible because the income statement may still show recognised revenue.

Cash, however, tells a different story.

A company could have RM1 million of recognised revenue while having invoiced only RM750,000. Salaries, suppliers and overhead still need to be paid using actual cash.

Large underbilling balances can therefore contribute to:

• Cash shortages
• Higher financing needs
• Collection delays
• Project disputes
• Margin surprises

Underbilling should therefore be monitored as part of working capital management, not just bookkeeping.

Which Businesses Commonly Experience Overbilling and Underbilling?

The issue is most common where delivery, revenue recognition and invoicing happen at different times.

Construction and Engineering

Construction projects often use progress payments, certifications and retention arrangements.

Retention means part of a payment can be withheld until specified contractual conditions are met, commonly including completion or rectification requirements.

This can create differences between work performed, recognised revenue, billed amounts and cash received.

Marketing and Creative Agencies

An agency may invoice at the beginning of a month while services are delivered throughout it. It may also complete extra work before receiving approval to bill.

Both situations can create temporary billing differences.

IT and Software Development

Software projects commonly use milestone payments such as:

30% on confirmation → 40% after development → 30% after launch

Actual project progress rarely matches those percentages perfectly, so billing positions can shift throughout the project.

Consultants and Professional Services

Consultants, architects, accountants and other professional service providers may use retainers, fixed fees or time-based billing.

Where services are performed before invoices are issued, underbilling can build up.

Subscription and Service Businesses

Annual subscriptions paid upfront can create similar timing differences.

Cash may be collected today even though services will be provided over the coming months.

Read More: Finance vs Accounting in Malaysia: What Your Business Needs

How Can Businesses Control Overbilling and Underbilling?

Temporary billing differences are not always a problem.

The key is to understand why they exist and whether they are supported by contracts, project records and accounting treatment.

A monthly review can compare:

Project Metric	What to Check
Contract value	Current approved project value
Revenue recognised	Amount supported by project performance
Amount billed	Total invoices issued
Cash collected	Amount actually received

Management can then investigate unusually large differences.

It also helps to reconcile variation orders, approved milestones, timesheets, purchase orders and progress certificates before month-end.

Strong communication between operations and finance is equally important. Finance cannot invoice work it does not know has been completed.

Is Overbilling or Underbilling Better?

Neither is automatically good or bad.

Some overbilling can strengthen working capital because customers are funding part of the project in advance. However, the business may still have significant work left to complete.

Some underbilling is also normal when there is a short delay between performing work and issuing the next claim.

The warning sign is when either balance becomes unusually large, remains unresolved for several reporting periods or cannot be clearly explained.

A useful management question is:

“Can we explain every major billing difference, and do we know when it will reverse?”

Understanding the Differences

The main difference in overbilling vs underbilling is timing. Overbilling generally means customer billings are ahead of recognised revenue, while underbilling means recognised revenue is ahead of customer billings.

Both can occur naturally in construction, consulting, agencies, technology projects and other businesses that use milestone or progress billing. Problems usually arise when billing differences are not monitored, supporting documents are missing or management mistakes invoices issued for revenue earned or profit generated.

Clear contracts, regular billing reconciliations and close coordination between finance and project teams can make these balances much easier to control.

If your business needs help keeping project billings, reconciliations and financial records accurate, Accounting.my provides professional accounting and bookkeeping services for Malaysian businesses. Proper records can make it easier to monitor cash flow, stay on top of outstanding billings and maintain reliable financial information.

Disclaimer: This article provides general information only and is not accounting, tax or legal advice. The correct treatment can depend on the contract, applicable financial reporting framework and individual circumstances. Businesses should seek professional advice where necessary.

Sources

• Inland Revenue Board of Malaysia (HASiL): E-Invoice Guideline and procedures for correcting validated e-Invoices.
• HASiL MyInvois SDK: Credit note, debit note and refund note e-Invoice guidance.
• IFRS Foundation: IFRS 15 Revenue from Contracts with Customers.
• Malaysian Financial Reporting Standards: MFRS 15 Revenue from Contracts with Customers.
• Malaysian construction guidance: Progress billing, certification and retention-payment practices.